Abstract

A central goal of modern US securities law is the transparency of corporate information through mandatory public disclosures. This goal is in tension with a central goal of banking law, namely, the practice of preserving opacity of the information exchanged between banks and bank supervisors to ensure the safety and soundness of individual banks and the entire banking system. That informational opacity in banking known as "confidential supervisory information" (CSI) applies equally to all banks, whether or not they sell securities subject to public disclosure requirements. The disclosure of CSI is prohibited by law and practice, with dire consequences for those who violate these prohibitions. How significant is this tension between securities and banking laws? If CSI is always immaterial to investors-the unofficial or de facto position of bank regulators supported by some previous studies of the subject-then the conflict is easy to resolve, but raises questions about what, exactly, the process of bank supervision accomplishes. If some CSI is in fact material to investors, then the failure by companies and insiders to disclose it may violate federal securities law. Using a dataset of unexpected CSI leaks at publicly traded bank holding companies, we empirically assess the materiality of certain CSI to market investors. We find abnormal returns with significant magnitude on days that CSI is unexpectedly leaked. Our findings, therefore, establish that at least some CSI is material to public investors, raising implications for disclosure compliance, insider trading, and regulatory accountability. We also document that unexpected leaks generate significant changes in implied credit default spreads in a direction that is mostly consistent with the documented abnormal returns. The results shed new light on the tradeoffs between opacity and disclosure policies for banking organizations.

Disciplines

Law and Economics | Securities Law

Date of this Version

9-22-2025

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